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Full text of "Staff data on minor tax bills pending before the Committee on Finance on January 6, 1956"

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STAFF DATA 


ON 


MINOR TAX BILLS PENDING BEFORE 


THE COMMITTEE ON FINANCE 


ON JANUARY 6, 1956 


PREPARED FOR THE 


COMMITTEE ON FINANCE 


OF THE U. S. SENATE 


BY THE 


STAFF OF THE JOINT COMMITTEE ON 


INTERNAL REVENUE TAXATION 


UNITED STATES 


GOVEKNMENT PRINTING OFFICE 


70848 WASHINGTON : 1956 



MINOR TAX BILLS PENDING BEFORE THE COMMITTEE 
ON FINANCE ON JANUARY 6, 1956 



1. Carryback and Carryover of Foreign Tax Credit (H. R 

6728; H. Rept. 1346) 

Under section 904 of the 1954 code, the foreign tax credit is limited 
by the so-called per country limitation, which restricts the credit to 
an amount equal to the same proportion of the taxpayer's total tax 
liability as the income from the foreign country bears to all of the 
taxpayer's income. Thus, under this limitation credit is denied with 
respect to that part of the income tax of a foreign country which is 
proportionately greater than the United States tax. This bill per- 
mits foreign taxes which cannot be claimed currently as a tax credit 
by reason of the per country limitation to be carried back to the 2 
prior years or forward to the 5 succeeding years and used in those 
years to the extent permitted under the per country limitation. 

2. Replacement of Involuntary Liquidations of Last-in and 
FiRST-ouT (LIFO) Inventories (H. R. 6999; H. Rept. 1307) 

Under section 1321 of the 1954 code, when an involuntary liquida- 
tion of LIFO inventory occurs, the taxpayer may redetermine his 
tax liability for the year in which such liquidation occurred if liqui- 
dated inventory is replaced in a year ending before January 1, 1956. 
Where the taxpayer elects to make these adjustments, all taxes, 
including excess-profits taxes, for the years affected must be redeter- 
mined. This bill would provide that these adjustments are not taken 
into account m applying section 459 (f) of the 1939 code. 

This section provided excess-profits tax relief to manufacturers of 
certain metals by providing that the average base period net income 
computed under a modified growth formula must not exceed 80 per- 
cent of the excess-profits tax net income for the taxpayer's first 
taxable year under the 1950 Excess-Profits Tax Act. Thus, if LIFO 
mventory involuntarily hquidated in 1950 is replaced under section 
1321, 1950 income will be decreased which, in turn, reduces average 
base period income which affects excess-profits taxes for years 1950-53. 
The bill would prevent this decrease in average base period income 

3. Removal of the 10-Percent Excise Tax on Aromatic 
Cachous (H. R. 4668; H. Rept. 1439) 

This bill amends section 4021 of the 1954 code to exclude aromatic 
cachous (Sen Sen) from the list of toilet preparations on which a 10- 
percent excise tax is imposed. 

1 



2 MINOR TAX BILLS PENDING 

4. Amendment of Section 421 (A) of the Internal Code of 1954 
Relating to Restricted Employee Stock Options (H. R. 7064; 
H. Rept. 1355) 

This bill amends tlic stock option provisions contained in section 
421 of the Internal Revenue Code of 1954. It provides that an em- 
ployee who has been separated from the service of an employer issu- 
ing a restrictetl stock option is to have 6 months after separation in- 
stead of the 3 montlis provided in present law to exercise the stock 
option. The change made by this bill will be effective with respect 
to restricted stock options exercised after December 31, 1954, for 
years ending after than date. 

5. Computation of Certain Credits Against Income When a 
Corporation Has Net Capital Gain (H. R. 7282; H. Rept. 
1356) 

Where a corporation uses the alternative method of computing its 
tax on long-term capital gains, a partial tax is first imposed by section 
117 (c) (1) (A) of the 1939 code on the net income less the excess long- 
term capital gain. Certain credits are allowed against this ordinary 
net income, namely, the credit for dividends received, section 26 (b), 
the credit for dividends paid on certain perf erred stock, section 26 (h), 
and a credit to Western Hemisphere trade corporations, section 26 (i). 
This bill deals with the determination of these credits against income 
in computing the partial tax on corporations using the alternative 
method for taxing capital gains. 

Under the 1939 code, these credits are limited to a percentage of 
"adjusted net income" (sec. 26 (b) and sec. 26 (h)) or of "normal- 
tax net income" (sec. 26 (i)). For the limited purpose of computing 
the maximum limitation on these credits under the partial tax, this 
bill includes the capital gains in income. This bill adopts the position 
of the Treasury effective prior to 1952 and concerns only the vears 
1952 and 1953. 

6. Period of Limitation for Filing Claims by Certain Trans- 
ferees and Fiduciaries for Credit or Refund (H. R. 5428; 
H. Rept. 1448) 

Wliere a transferee or fiduciary waives the period of limitation on 
the assessment of tax, this bill amends section 311 (b) (4) of the 1939 
code to extend, for a like period, the time in which a claim for credit 
or refund may be filed by the transferee or fiduciary. This bill gives 
relief to taxes arising under the 1939 code that is given by section 6901 
to taxes under the 1954 code. 

7. Amendment to Section 7 of the Technical Changes Act of 

1949 (H. R. 6595; H. Rept. 1493) 

This bill would permit refunds or credits of overpayment of estate 
taxes of certain decedents dying between November 11, 1935, and 
before January 30, 1940, where the case was closed on October 25, 
1949. The ])ill would give relief to estates of decedents who either 
retained a life estate or other income interest in property transferred 
during life before March 4, 1931, or who had a reversionary mterest 
of less than 5 percent in property transferred during life. 



minor tax bills pending 3 

8. Inclusion op Life Insurance in Gross Estate of Decedent 
Dying Between February 10, 1939, and January 11, 1941 
(H. R. 7012; H. Kept. 1494) 

Under the law in effect from 1926 to 1941, insurance payable to 
beneficiaries other than the executor would be included in the gross 
estate to the extent of the excess over $40,000 under policies taken 
out by the decedent upon his own life. Thus, under this statute 
policies could be included in the gross estate if the decedent had an 
incident of ownership in the policy, such as a reversionary interest, 
whether or not he paid the premiums. 

Congress subsequently has amended the law applicable to decedents 
dying after January 11, 1941, but the law in effect from 1926 to 1941 
has not been changed. Under the 1942 act, as amended, insurance 
is includible in the gross estate of a person dying after January 11, 
1941, to the extent of premiums paid by the decedent whether or not 
he retained an incident of ownership. However, premiums paid 
while the old law was in effect will not be considered as having been 
paid by the decedent if he did not have an incident of ownership in 
the policy after January 11, 1941. For this purpose an incident of 
ownership does not include a reversionary interest of less than 5 
percent. 

This bill would exclude life insurance from the estate of a person 
dying between February 10, 1939, and January 11, 1941, who paid 
the premiums on the policies if he did not have a reversionary interest 
in the policy exceeding 5 percent. 

9. Credit Against Estate Tax for Tax on Certain Prior Trans- 

fers (H. R. 7054; H. Rept. 1495) 

The 1954 code enacted a new provision that gave a credit against 
the estate tax of a decedent for the estate tax paid on property by a 
prior decedent if the decedent had received property from the prior 
decedent within the preceding 10 years. The 1939 code had a deduc- 
tion for the value of property included in the estate of the decedent 
if it had been included in the estate of a prior decedent within 5 
years. However, no deduction was granted if the decedent was the 
spouse of the prior decedent and the estate tax marital deduction 
was availed of. This bill makes the provision in the 1954 code 
applicable to decedents dying after December 31, 1951, if the executor 
so elects and the decedent died within 6 months of her spouse. 

10. Removal of Documentary Stamp Tax on Transfers of 
Certain Obligations Paid for in Installments (H. R. 7364; 
H. Rept 1497) 

This bill amends (section 4332 of the 1954 code in order to reenact 
an exemption contained in the 1939 code, namely the exemption 
from the stamp tax of transfers of certain obligations which must be 
paid for in installments not amounting to more than 20 percent of 
the cash value of the obligation at maturity. 



4 MINOR TAX BILLS PHXDING 

1 1 . ( \\RUY()VKR OF Unused Pension Trusts Deductions in Certain 

Cases (H. R. 4582; H. Reft. 1594) 

riulor iho 1939 code, a parent corporation was permitted to deduct 

any unused pension trust contributions of its subsidiary corporation 
following the liquidation of the subsidiary when the liqui(hition was 
accomi)lished by a corporate merger of the subsidiary with the parent, 
'{'he unused pension trust contributions could not be deducted by the 
l^arenl, however, when the subsidiary was liquidated in a transaction 
which did not qualify as a merger under State law. 

This distinction will not arise under the 1954 code because section 
881 (c) (11) permits the acquiring corporation to deduct unused pen- 
sion trust contributions of the subsidiary irrespective of whether the 
liquidation quahfies as a merger. 

This bill adds a new paragraph to section 381 (c) of the 1954 code 
to allow a parent corporation to deduct unused pension trust contribu- 
tions of its subsidiary in any taxable year to which the 1954 code 
applies if (1) the corporate laws of the State of incorporation of the 
subsidiary required the surviving corporation in a merger to be incor- 
porated under the laws of that State, and (2) the properties were 
acquired in a tax-free liquidation of the subsidiarv under section 
112 (b) (6) of the 1939 code. 

12, Exemption From Transportation Tax of Foreign Travel 

(H. R. 5265; H. Rept. 1598) 

This bill would exempt from the tax on transportation of persons 
travel to places outside the United States from the last station inside 
the United States. In case of travel from one point in the United 
States to another point in the United States, the portion of the travel 
outside the United States will be exempt if any part of the trip is 
more than 200 miles outside the United States. 

13. Liberalization of the Earned Income Limitation on 
Retirement Income (H. R. 7036; H. Rept. 1595) 

H. R. 7036 amends the retirement income credit provisions of 
section 37 of the 1954 code so that the earnings test under section 37 
corresponds with the work test under the present social security laws. 

Under section 37, an individual who is under 75 years of age is 
permitted to earn up to $900 a year without affecting the amount of 
his retirement income credit. However, earnings in excess of $900 
in the case of an individual under age 75 reduce dollar for dollar 
the credit for retirement income. For those aged 75 or over there is 
no income limitation. These provisions were designed to correspond 
to the provisions of the social security laws which were in effect at 
the time the 1954 code was enacted. However, the Social Security 
Amendments of 1954, passed by Congress after the 1954 code was en- 
acted, raised from $900 to $1,200 the amount of earned income which 
could be excluded in determining whether social security benefits 
were to be reduced, and made the work test inapplicable to those 
age 72 and over rather than age 75 and over. 

The changes made in this bill conform to the changes made in the 
Social Security Amendments of 1954. The bill applies only to taxable 
years beginning after December 31, 1955. 



MINOR TAX BILLS PENDING O 

14. Unlimited Charitable Deductions for Certain Individuals 
(H. R. 7094; H. Reft. 1596) 

Under the 1939 code the 20 percent limitation on charitable con- 
tributions did not apply where the taxpayer's charitable contributions, 
plus his income-tax payments in the current year and in each of the 
prior 10 years, exceeded 90 percent of his net income. The 1954 code 
liberalized this provision to require that the 90 percent test must be 
met in only 8 out of 10 preceding years. However, the 1954 code 
provision was effective onl}^ with respect to taxable years beginning- 
after December 31, 1953, and ending after August 16, 1954. This 
bill extends the unlimited charitable deduction provisions of section 
170 (b) (1) (C) of the 1954 code to all taxable years to which the 1939 
code applies. 

A refund attributable to an overpayment of tax resulting from the 
enactment of the bill will be permitted only if the amount of the refund 
is paid as a charitable contribution. A 7-year period of limitation is 
provided in lieu of the 3-year period presently allowed in which to 
claim the refund, but no interest is to be paid on an^^ refund resultmg 
from the enactment of the bill. 

15. Recognition of Gain or Loss in Certain Railroad 
Reorganizations (H. R. 7247; H. Rept. 1599) 

This bill adds a new section 374 to the 1954 code to provide that 
no gain or loss will be recognized to a railroad corporation where its 
properties are transferred, pursuant to a court order in a receivership 
proceeding or in a proceeding under the Bankruptcy Act, in a reor- 
ganization approved by the court in exchange solely for stock or 
securities in another railroad corporation. 

Under section 373 of the 1954 code, no loss is recognized where 
property of a railroad corporation is transferred to another railroad 
corporation in a receivership or bankruptcy proceeding. The bill 
provides for the nonrecognition of gain in such cases where the prop- 
erty of a transferor corporation is exchanged solely for stock or 
securities of the transferee corporation. In general, the provisions of 
this bill correspond to the provisions of section 371 which apply to 
reorganization by corporations other than railroad in receivership, 
foreclosure, or similar proceedings, or proceedings under chapter 10 
of the Bankruptcy Act. Section 373 is amended so as to be limited 
to transfers before August 1, 1955. 

16. Retroactive Exemption From Estate Tax of Certain Trust 
Property (H. R. 2667; H. Rept. 1605) 

This bill amends section 208 (b) of the Technical Changes Act of 
1953 by making that provision applicable to estates of decedents 
dying after December 31, 1947, instead of to estates of decedents 
dying after December 31, 1950. 

Section 208 of the Technical Changes Act of 1953 exempts from the 
estate tax certain trust property subject to a power in the grantor to 
change the beneficiaries or their interests in the trust where the grantor 
died under a disability after December 31, 1950, and he was under 
this disability for a continuous period beginning not less than 3 
months before December 31, 1947, and ending with his death. The 
reason for this act was that if the grantor had not been under a dis- 



(J MLXUK TAX BILLS PENDING 

ability prior to Docrmhor 81, 1947. ho would have been able to remove 
the trust property from his estate without ineurririg a gift tax under 
section 1000 (e) of the 1939 eode. 

17. F^xcisK Tax ox Installation Charges on Community Tele- 
vision Keceiving Antenna Equipment (H. R. 3413; H. Rept. 
IGOO) 

H. R. 3413 amends seetion 4252 (e) of the 1954 eode by providing 
that the term "wire and equipment service," for purposes of the 
8 percent eommunications tax, is not to include the installation 
charges for community television receiving antenna equipment in- 
volving the use of cables or wires from the location of the receiving 
antenna to the location of the television receiving sets. This equip- 
ment is used primarily by subscribers in valleys and in mountainous 
areas where direct reception is obstructed. The amendment is to be 
effective with respect to installation begun on or after the date of 
enactment of the bill. 

18 T\x Treatment of Certain Transfers of Patent Rights 
(H. R. 6143; H. Rept. 1607) 

The 1954 code has a special provision assuring that certain trans- 
fers of patent rights by inventors and individuals that acquire an 
interest in the patent before it was reduced to practice will be treated 
as sales and not as licenses. This bill extends the provision in the 
1954 code to taxable years beginning after May 31, 1950, which was 
the date the Treasury announced it would not treat these agreements 
as sales. 

19. Property Subdivided for Sale (H. R. 6712; H. Rept. 1608) 

Prior to the enactment of the 1954 code when a taxpayer subdivided 
real property for sale, he was likely to be considered as holding the 
property for sale to customers. A provision in the 1954 code gave 
special treatment to property held by individuals who were not real- 
(^state dealers if the property had been held for more than 5 years and 
no substantial improvements had been made in the property by the 
taxpayer. This bill will extend the section to include corporations if 
none of the shareholders are real-estate dealers, and it will allow the 
taxpayer to install water or sewer facilities, roads, and other public 
utilities on the property if the property was acquired by foreclosure and 
has been held for 10 years. 

20. Increase From 35 to 60 Cents in the Exemption From Tax 
ON Amounts Paid for the Transportation of Persons (H. 
R. 7634; H. Rept. 1609) 

AMien the 10-percent excise tax on transportation of persons was im- 
posed in 1 94 1 , an exemption of 35 cents was provided in order to exclude 
from the ta.x the ordinary trip involved in commuting to and from 
work. This bill increases the exemption from 35 to 60 cents in order 
to adjust the exemption level to be consistent with the most common 
increase in the price of transportation services since 1941. The bill 
applies only to amounts paid on or after the first day of the month 
beginning more than 10 days after the enactment of the bill.